Electric power price spikes tenfold

George Raine, OF THE EXAMINER STAFF

Published 4:00 am, Friday, July 10, 1998

1998-07-10 04:00:00 PDT CALIFORNIA; UNITED STATES -- Electrical energy purchased for reserve purposes in California's new competitive market cost $5,000 per megawatt from 2 to 5 p.m. on Thursday, an astonishing 1,000 percent more than the cost when utilities enjoyed their monopolies.

The reserve category has no cost cap, and under the rules of the deregulated energy market California was obligated to accept the price.

Officials Thursday sought permission from federal regulators to limit the expense, in the short term, and scrambled to devise means to make the market more competitive and thus lower costs.

"I'm quite worried about this," Jeffrey Tranen, the CEO of the California Independent System Operator (ISO), the new operator of the electrical grid in California, told reporters Thursday. "But I believe it is a blip that we will resolve."

Secondly, software limitations currently prevent out-of-state energy providers, such as the Bonneville Power Administration with enormous hydroelectric capacity in the Northwest, from competing in this category. More competitors would force prices down, the theory goes.

The ISO Wednesday made a decision to purchase power for reserve because there was a difference between the energy demand the retail marketplace anticipated and its own forecast. The extra energy was ordered as reserve, in the event that not enough power had been scheduled by the ISO to meet Thursday's demand in the state.

In the end, no extra power was necessary, but California had to pay an energy provider to run generators just in case, under the terms of the reserve agreement. Tranen estimated the full bill for the three hours was $1.5 million, which will be passed on to consumers.

Tranen would not disclose which provider charged $5,000 per megawatt, from 2 until 5 p.m. However, there are only four possible choices, all of which have purchased power plants from California public utilities: Duke Energy Corp.; Dynegy Inc.; Noram, a unit of Houston Industries; and AES Corp. Spokesmen for them had no comment or said they do not discuss marketing strategy.

The extra power was ordered in Southern California (which would exclude Duke, which is operating in Northern California, having closed on its purchase of PG&E plants July 1).

According to a reconstruction by Tranen and Patrick Dorinson, an ISO spokesman, this is what happened:

Several bids were placed Wednesday for the reserve order. The bid for $5,000 (for 500 megawatts) was by far the most expensive. California accepted all the less expensive bids until only the high bid remained. The system operators paid it, rather than risk not having enough power to meet demand.

For most of Thursday, the reserve power cost $1 per megawatt. At 2 p.m. the price shot up to $2,500 per megawatt. It was $5,000 from 2 to 5 p.m., during peak demand, and was $750 from 5 to 6 p.m. After 6 p.m. it ranged from $3 to $1.

On Thursday Tranen decided not to order a reserve for Friday. He said it was because he didn't think it was needed.

Mike Florio, an attorney for the San Francisco-based consumer advocacy group TURN, The Utility Reform Network, said, "There is a disconnect between declaring the market to be working completely competitively and not having enough competitors."

He said he believed that permitting out-of-state providers to enter the reserve market would do much to lower costs.

News of the price spike came as Tranen was giving a previously scheduled briefing to reporters via conference call about the first 100 days of the ISO's operation - he called it smooth - but he quickly turned his attention to the $5,000 charge. He said it was by far the highest charge the ISO has seen in 100 days.

"This is a case of evolving markets, and the question is, at what point does the market structure reach a level where you can rely on the market to provide a market-based competitive price? But we're making an emergency appeal" to federal regulators, Tranen said.&lt;